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Order Instituting Rulemaking into Implementation of Pub. Util. Code § 390.

Rulemaking 99-11-022



May 1, 2001



Pending implementation of a PX-based SRAC, Section 390 (b) provided for a "transition" formula for determining the SRAC. Section 390 (b), therefore, is the code to which the CPUC's SRAC methodology currently must conform.

The Commission worked out the implementation details of this mandate in D.96-12-028. For each utility, the SRAC varied from month to month, based on changes in the average spot price for natural gas as traded at the California border and reported in several trade publications. For Pacific Gas and Electric (PG&E), the border price was weighted between two different border points _ 50% at Malin and 50% at Topock. For San Diego Gas & Electric (SDG&E) and Southern California Edison (Edison) the border price was set entirely at the Topock border price.

Summaries of Pre-Workshop Written Comments

California Cogeneration Council (CCC):

Production basin plus interstate transportation: CCC maintains that this approach does not comply with Section 390 (b). In addition, CCC argues that since the pipelines are fully subscribed, it is impossible to buy gas on a short-run basis, and therefore this also violates PURPA.

Other southern California border trading points: CCC notes that alternative trading points include North Needles (TransWestern), Wheeler Ridge (Kern River and Mojave), Kern River Station (PG&E). CCC explains that all of these trading points show prices virtually identical to those at Topock - there is only one southern California trading price _ and that it has no objection to the Commission's using these other trading points instead of Topock for the SRAC.

CCC also attached to its comments a copy of the April 5, 2001 filing it had submitted to the FERC in which CCC requested that FERC initiate an enforcement action against the CPUC for alleged violations of PURPA resulting from the March 27 decision.

Calpine Corporation (Calpine):

Calpine cautions that the California Department of Water Resources (DWR) is purchasing power on the margin at rates far higher than prices paid to QFs. Calpine argues that by substituting gas prices from Malin simply because it is lower not only results in inaccurate avoided costs, but also ensures that gas-fired QFs cannot operate. Calpine also argues that alleging market abuse at Topock does not disqualify this index for avoided cost purposes.

County of Los Angeles (Los Angeles):

Department of the Navy (DON):

Office of Ratepayer Advocates (ORA):

Pacific Gas and Electric (PG&E):

In the short run, PG&E supports replacing Topock indices with Malin, but with the caveat that the intrastate transport rate should be removed from the SRAC calculation. PG&E argues that the use of this tariff implies transporting gas from Malin, down to the SoCalGas border, and then back.8

PG&E considers that use of any border index, be it Topock or Malin, is in the long run imprudent, given their exposure to market conditions which may render them unsuitable for SRAC purposes. PG&E recommends, for the circumstance in which Section 390 does not hold, the use of DWR average purchase price, provided these are adjusted to arrive at an energy-only price.

San Diego Gas & Electric (SDG&E):

Southern California Edison Company (Edison):

Edison lists several policy guidelines which it believes should inform Commission policy with respect to SRAC. These principles include: utility avoided cost principles as mandated by PURPA, recognition that where a legal conflict exists Federal law supercedes state law (i.e., PURPA supercedes Section 390 (b)), legal irrelevancy of QF operating costs, skepticism that spot gas prices are representative of utility avoided costs, and belief that a prudent gas buyer would contract for long-term transportation. Edison also holds that the WACAG is a reasonable substitute for Edison's avoided fuel costs, being both consistent with the company's historical practice, and subject to on-going reasonableness review. Finally, Edison suggests that as an expedient mechanism to ensure that gas-fired QFs stay on line the Commission authorize a "parity adjustment". This would be made available on an interim basis and subject to substantiation by the QF of need.

Tractebel Power, Inc. and Tractebel Energy Marketing, Inc. (Tractebel):

The Workshop

The workshop was held on April 19, 2001 in the Training Room at the CPUC at 505 Van Ness Avenue in San Francisco. It began at 9:30 a.m. and ended at 4 p.m. Approximately 40 persons participated. Following introductory remarks by the moderator, Energy Division's James Loewen, Cogeneration Association of California (CAC) representative Michael Alcantar expressed CAC's position that by participating in this workshop, CAC in no way waived its right to challenge the legality of D.01-03-067. Following a short discussion, it was agreed that all participants retained their right to challenge this proceeding, notwithstanding their presence at the workshop; indeed no participant's right to take any position was to be affected by their presence.

Gas Transportation Logistics:

CCC's pre-workshop comments had been particularly detailed and helpful in describing the network of pipelines in California as well as the difficulties it believed QFs were faced with in procuring gas. Consequently, CCC witness Tom Beach had been invited to make a presentation to the group. Since Mr. Beach had fallen ill and was not available, his colleague, Patrick McGuire made the presentation. Essentially, the presentation followed the lines of CCC's comments. Mr. McGuire related that PG&E's Redwood Path pipeline, which connects Malin (California/Oregon border) in the north to Kern River Station (PG&E/SoCalGas border) in the south, had been fully subscribed as of 1998 and would remain so until 2002 (one participant later noted that this should be until 2003). In response to a question asking clarification about Kern River and Kern River Station, Mr. McGuire explained that the former is an interstate pipeline, whereas the latter is a trading point located inside California.

Mr. McGuire's presentation next addressed the historical behavior of various gas indices. In addition to the price data distributed by Mr. McGuire (see Appendix E for copies of his presentation), data which had been compiled by Edison's Eric Lavik for Energy Division the day before the workshop (see Appendix F) were also handed out. From these data several observations were made. First, the various southern California indices _ Topock (El Paso), North Needles (Transwestern), Kern River Station (PG&E), Blythe (El Paso) have historically and even now continue to track each other very closely. Second, Malin often has tracked the southern California indices closely, but in recent months has been significantly cheaper than Topock. Third, PG&E's city-gate price in recent months has been approximately half-way between Malin and the southern California price.

There was some discussion as to why the Malin price should recently have diverged from the Topock price. Mr. McGuire opined that this was due to congestion on the Redwood Path pipeline, as well as to increased price differentials between the production basins which respectively feed Malin and Topock (e.g., Alberta and the San Juan basin).

Mr. McGuire was asked to explain how consumers located in, say, southern California, would go about procuring transportation for gas which they bought at Malin. He explained that there is a secondary transportation market _ those parties who secured firm transportation rights in 1998 now are in a position to charge other parties for the right to transport gas through the pipeline. The amount which they can charge for transportation is effectively set by the price differential in the gas market between Malin and southern California. In this way, even if a customer succeeds in buying gas at Malin, once he has paid for transportation to southern California, the effective price would be the Topock price. This of course assumes that the customer has no pre-existing arrangements to procure or transport gas.

Mr. McGuire also asserted that the same difficulty arose for customers located in PG&E's territory. Transporting gas from Malin to any location in PG&E territory still requires use of PG&E's congested backbone pipeline system, and hence will cost more than the Malin plus tariffed transport rate.

Richard Myers of Energy Division pointed out that there is a substantial price difference between the Topock price index for PG&E and the Topock price index for SoCalGas. In other words, customers in PG&E territory who are buying gas at Topock are able to secure cheaper gas than customers in SoCalGas territory who are buying gas at Topock.10 This observation does cast the PG&E QF situation in a different light. One element of uncertainty here regards liquidity _ how big are the volumes being moved out of Topock into PG&E territory at this lower price?

Seeking to get some consensus regarding at least one factual matter, the moderator asked if any of the participants were willing to assert that a southern California QF (or any electric generator, or any non-core customer for that matter) who did not have pre-existing gas procurement and transportation arrangements could buy and transport gas at a Malin plus tariffed transportation price. No one was willing to make this assertion. Next, participants were asked about generators located in northern California, with the same response.11

QF Operating Costs:

Seeing as the SRAC level is only one of the factors determining the economics of QF operations, the moderator listed several other factors which come into play _ previous gas arrangements, capacity payment levels, heat rates, and, for cogenerators, the commercial value of byproduct heat. Participants were asked for their thoughts about these factors. CAC's Alcantar argued that consideration of these factors is illegal since doing so would violate PURPA's mandate to focus on the utility's avoided costs instead of on the QFs operating costs. Lars Bergmann of Edison supported Mr. Alcantar's contention, saying that QF operating costs are not relevant to this proceeding. He stated that he is not seeking declarations from QFs regarding their operating costs. Indeed, no QF volunteered to declare its operating costs.

Mr. Alcantar offered that his clients would be happy to have the state, or the utility, supply gas to them. Other QFs expressed common sentiments. Mr. Bergmann responded that Edison did not have the obligation to purchase gas for the QFs.

Aside: Importance of Back Payments in QF Non-Performance:

Part of the context for this workshop is the fact that some QFs are currently offline for economic reasons. QFs have stated in other forums that low SRAC payments are not the only factor in the decision to shut down. In addition, the fact that most had not been paid for several months prior to March 27, 2001 was said to jeopardize their own cash flow and credit status, making it difficult to buy fuel. Participants were asked which factor was more important in their decision not to generate _ the back payments or the SRAC.

Responses to this question were mixed. Some QFs said the matter of back payments was more important, while others said that the going-forward SRAC payments were more important. Edison said that prior to D.01-03-067 (which ordered the utilities to resume QF payments and altered the SRAC) it had about 700 MW of QFs offline for economic reasons; since the decision, it has had only 225 MW offline (of these, 145 MW are paid the Malin-based SRAC, while 80 MW have special contracts with energy payments based on Topock). Tractebel explained that it generated until March 27, so clearly its determining factor was the SRAC level. CCC and CAC say that for them the back payments are a stronger factor.

Alternatives _ Given Section 390 (b):

Alternatives _ If Section 390 (b) Were Repealed:

Key Findings

The workshop resulted in consensus that electric generators located in southern California who have not previously made procurement and transportation arrangements cannot buy and transport gas at a price equal to the Malin spot price plus the intrastate firm transport rate.12 While the problem is decidedly less severe for generators in PG&E service territory, the same holds true for electric generators located in northern California.


I certify that I have by mail this day served a true copy of the original attached Final Report on Workshop to Discuss Alternative Gas Indices on all parties of record in this proceeding or their attorneys of record. In addition, service was also performed by electronic mail.

Dated May 1, 2001, at San Francisco, California.


Parties should notify the Process Office, Public Utilities Commission, 505 Van Ness Avenue, Room 2000, San Francisco, CA 94102, of any change of address to insure that they continue to receive documents. You must indicate the proceeding number on the service list on which your name appears.

List of Appendices

1 The comments of the Departmant of the Navy (DON) were accompanied by a motion to intervene. 2 The 2000 California Gas Report (2000 CGR) is prepared by California gas utilities, with oversight by the CPUC and the California Energy Commission. 3 The city-gate price is the market price of gas delivered to customers in PG&E's service territory that is unloaded off of PG&E's backbone pipeline system. 4 In response to data requests to the utilities, Energy Division has been provided a much smaller estimate of QF generation that is currently offline for economic or financial reasons: approximately 620 MW for PG&E, 320 MW for Edison, and 150 MW for SDG&E _ totaling approximately 1,090 MW. In addition to QFs who are shut down, there may be other QFs who are producing at reduced levels. 5 D.96-12-028 emphasized the importance of robustness in choosing gas indices (sections 5.2 and 5.4). 6 This is the cost of gas which SoCalGas buys for its customers. 7 As of April 26, 2001, the status of this bill was inactive. 8 A reading of PG&E's tariff G-AAOFF shows that this tariff covers the transport cost for gas taken at one of several entry points, among which is Malin, and delivered to customers located along PG&E's main "backbone" pipeline system. 9 The Enerfax energy news service report for May 1, 2001 showed an El Paso San Juan price of $4.62/MMBtu while the California Border price (southern California) was $14.50. 10 Data compiled by Energy Division for the past several months shows the PG&E-Topock price averaging close to the PG&E city-gate price, i.e., higher than Malin and lower than SoCalGas-Topock. 11 Parties have not objected to the 50% Malin portion of the pre-March 27 SRAC for PG&E's QFs. One reason may be that since that SRAC was established in 1996, generators have had ample time to secure long-term transportation arrangements. 12 The Enerfax energy news service report for May 1, 2001 showed a significant gap between the southern California border price ($14.50/MMBtu) and the border price at Malin ($7.80/MMBtu). PG&E's gas transportation tariff G-AAOFF is $0.42/MMBtu.

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